EIS Investing: The Advisers’ Guide To Surviving The Busy Season
Investing in tax efficient investment propositions such as the Enterprise Investment Scheme and Seed Enterprise Investment Scheme should be considered throughout the year. Despite this, there remains a rush in Q1 every year as investors, advisers and accountants attempt to address tax positions before the end of the tax year.
Although expected, there are some pitfalls that advisers should be aware of when investing during this period. Understanding these factors can lead to clearer decision making and therefore potentially better client outcomes. Below I will outline some of the, perhaps, key considerations and possible solutions.
First and foremost, leaving Investment decisions to the end of the tax year could leave advisers and investors with limited choice as to where to invest. If a product provider or investee company has a predefined capacity limit for the tax year then naturally investing later in the period will increase the risk of capacity exhaustion. Less choice of propositions could therefore lead to subscriptions being made into propositions which are not as appropriate for the client as those which may have been available earlier in the tax year.
Connected to the issue of capacity is the issue of deal flow. A good EIS manager should have a constant pipeline of investee companies ready to join the portfolio at any point. This not only increases capacity but also provides diversification and new opportunities for repeat investors. It is the balancing act that all good EIS managers perform, to ensure that there are enough companies in a portfolio to maximise investor capacity but also to ensure that investee companies receive the funding they require. Having a wide portfolio is one thing, but having companies within the portfolio being under-funded could be detrimental to investors and increase the risk of company failure or stagnated growth.
'Black box' investing
The EIS market was historically awash with propositions where the investment manager collated subscriptions throughout the year via a 'black box' approach and then, at the end of the tax year, deployed in to whatever EIS qualifying companies they could find. Thankfully, the market has moved on somewhat since then and there is much greater transparency as to what companies, or what type of companies, investors will be invested in. I maintain that ideally investors and advisers should know exactly in to which companies their investment will go.
Investing in small UK businesses is not the same as traditional equities investments. Broadly stating the market or sector in to which an investor is to be invested is entirely appropriate when looking at equities markets but when looking at small unquoted stock, I believe that it is important to understand the opportunities and the risks specific to the Company. Only with that information can you decide whether the overarching proposition is appropriate for a client. We don't expect advisers to undertake due diligence on underlying investee companies (that is our job) but we believe advisers should be able to articulate to investors more than just the potential tax reliefs available under EIS. We are increasingly hearing from advisers that clients appreciate the reassurance that comes with knowing where there money is going.
Very early stage investments, via the Seed Enterprise Investment Scheme, are slightly different as it is much more difficult to state what investors will be invested in due to limited capacity that can be deployed per company. Therefore I'd suggest that it is important to understand the types of companies within a portfolio and the provenance of investment deals. As an example, my team works closely with the likes of NHS trusts, academia and technology campuses to source the best SEIS opportunities. This is what advisers understand about our SEIS offerings rather than specific companies.
By their very nature, Seed Enterprise Investment Scheme investments are different to EIS as with SEIS it is expected that portfolios will be funded in tranches. As the companies are very young, or only just established, and can only receive a maximum of £150k via SEIS, then it is not easy to regularly deploy SEIS funds into companies. However, when considering EIS portfolios, it can be advantageous to choose a portfolio which regularly deploys in to investee companies. Regular deployment enables investors to start benefitting from potential tax reliefs at the earliest opportunity and allows investee companies to be regularly funded rather than receiving lump sums, which can on occasion be misused.
Investing via the Enterprise Investment Scheme and Seed Enterprise Investment Scheme should be considered throughout the year as part of prudent financial planning for appropriate clients. However, there will always be the end of tax year rush and advisers should consider the questions they ask of providers at this time of year especially.
Andrew Aldridge is Head of Marketing at Deepbridge Capital